Definition: An external environment is a group of factors or conditions that are outside the organization but affect it in some extent. In business, this term commonly applies to elements related to out of control dimensions such as society, economy, regulations and political system.

What Does External Environment Mean?

Every organization must understand key aspects of its external environment because institutions do not exist alone. They interact with other entities and are influenced by a wide range of events, situations and other player’s decisions that are out of its control. No matter how the firm controls its internal processes, there are many other aspects that also impact the performance and ultimately affect profitability and growth.

Government decisions, competitor movements and changes in the socio-economic environment are some issues that must be known and understood by the company. Identification and comprehension of those elements allows more complete analysis of risks and potential threats. Monitoring trends and forecasting events support better strategies because the firm can take advantage of positive situations and minimize the effect of adversities.


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